As it has been shown, several differences exist between the
proposed prototype and the alternatives adopted. These
differences are related to the integration of biological and
micro-economic factors at the farm level as well as
macro-economic influences. The factors that have influenced most
in the decisions of producers are:

BIOLOGICAL FACTORS: Soil Type and Pasture Species

Table 6 contains the main results of soil analysis performed
in 1991. Even when the IDA base document (CATIE, 1981) talks
about ecozones with similar characteristics, soil conditions
differ substantially.

Initially P contents differed greatly between farms in Río
Frío and Sonafluca (Murillo and Navarro, 1986), giving an idea
of the original soil material when producers acquired the land.
With time, P contents have evolved to similar levels, but their
fixation levels in the last analysis show two soils with
different development possibilities (Table 6): on one side,
manageable (i.e., 67%) in Sonafluca and on the other side, almost
impossible to correct (i.e., 92%) in Río Frío. This is due
mainly to the content of other nutrients in the soil, especially
calcium availability, which is higher in Sonafluca.

On the other side, the low P content has stimulated the
invasion of ratana. Arosemena (1990) reported internal P
requirements in ratana of 0.15% (as percentage found in tissue)
vs. 0.19% in Brachiariabrizantha, a specie known
to require less P than B. ruziziensis (CIAT, 1987).

Moreover, ratana competes favourable with other species.
Arosemena (1990) reported a 28% reduction on the relative weight
of biomass of B. brizantha with respect to ratana when
these competed for light, space, and nutrients. Therefore, ratana
not only requires less P but also outcompetes B. brizantha,
suggesting ratana is more aggressive under these soil conditions
than B. ruziziensis.

The problem of ratana invasion was exacerbated by the
producers themselves in Río Frío (Murillo and Navarro, 1986),
who initially saw an adequate vegetative behaviour in ratana.
However, once they realized its limited productivity, it was
almost impossible to revert this process. This can be observed in
producers which began dairying > 1982 (last), who have been
more careful in the management of this pasture (Table 2), but
still there is a trend towards greater proportions of ratana.

In Sonafluca, having a more fertile soil, this process has
been slower, and given the P fixation levels, becomes an
economically manageable problem.

Thus, soil characteristics have influenced at the farm level
the adoption and non-adoption of the following technologies
proposed by CATIE's:

(a) FERTILIZATION LEVELS: CATIE's prototype uses 250 kg
N/ha/yr based on research response to N by C. nlemfuensis
on the fertile soils of the Turrialba valley where CATIE is
located.

In less fertile soils and with ratana invasion, the
probability that producers obtained a response to N fertilization
was low. For this reason, N is used strategically only in areas
with cut-and-carry forage located next to the milking shed where
manure is also dumped.

On the other hand, when producers began dairying between 1979
and 1984, average milk price was highest in the last 20 years
[Table 7; (Cámara Nacional de Productores de Leche, 1991)]. This
allowed a good price relationship with respect to nitrogen [1 kg
N : 2 kg milk; (FERTICA, 1991)]. With the petroleum crisis in
1981-1982, N price increased and this relationship deteriorated
(1 kg N : 2.8 kg milk), making milk production based on
un-fertilized pastures more attractive since milk price stayed
relatively stable during these five years. This short-term effect
could have induced producers to use pastures (i.e., ratana) with
low N (and labour) requirements since labour costs drastically
increased >1982 [Table 8; (MTSS, 1991)]. Lately, this
relationship has improved (1 kg N : 1.7 kg milk), and farmers
have increased the amount applied per hectare, but its use has
been strategically limited to small areas not in ratana.

Table 7. Producer
prices per kilogram of milk in 1990 dollars for the
period 1970-1990.

Price

Price

Year

($/kg)

Year

($/kg)

1970

0.27

1980

0.33

1971

0.26

1981

0.34

1972

0.25

1982

0.33

1973

0.28

1983

0.35

1974

0.27

1984

0.32

1975

0.33

1985

0.30

1976

0.33

1986

0.28

1977

0.31

1987

0.28

1978

0.31

1988

0.27

1979

0.31

1989

0.29

1990

0.29

(b) SUPPLEMENTATION LEVELS: CATIE's prototype was designed to
use molasses (i.e., digestible energy) in strategic form to
complement protein produced by N fertilization of C.
nlemfuensis. With a pasture of the characteristics of ratana,
harvest cost is higher due to the lack of dry matter, thus dairy
cows require concentrate feeds to achieve production levels
obtained with other species such as B. ruziziensis.

With time, this induced producers to use greater quantities of
concentrate feeds, re-enforcing their decision by the price
relationship between concentrate feeds and molasses, especially
in the last five years [1 kg concentrate : 4.5 kg molasses;
(CATIE, 1991a)] relative to the period 1979-1984 (1 kg
concentrate : 6.5 kg molasses).

Table 8. Daily
labour wages for the livestock sector in 1990 dollars
including social benefits for the period 1970-1990.

Labour Wage

Labour Wage

Year

($/day)

Year

($/day)

1970

4.75

1980

6.48

1971

5.00

1981

5.85

1972

5.00

1982

5.65

1973

4.82

1983

6.54

1974

4.87

1984

6.88

1975

4.97

1985

7.36

1976

5.24

1986

7.80

1977

5.69

1987

7.79

1978

6.32

1988

7.56

1979

6.48

1989

7.80

1990

7.79

MACRO-ECONOMIC FACTORS: Government Incentives

The period from 1970 to 1980 was favourable for beef
development. High international prices stimulated beef exports to
the US and increased export earnings. Costa Rica went from
exporting $92.4 millions in 1973 ($4.55/kg, in 1990 dollars) to
$148.1 millions in 1979 [$4.69/kg; (BCCR, 1989)]. Likewise, high
export earnings from beef stimulated high milk prices to maintain
domestic consumption without having to import milk, currently at
about $0.20/kg. Additionally, the government restricted dairy
imports since 1979 (PNUD, 1979), stimulating the sector by
protecting the market from dumping.

In the middle of the 70s the government began to stimulate
beef and milk production, understanding that generating export
earnings from beef and substitution of dairy imports required
preferential conditions to stimulate the livestock sector.

This scenario has substantially changed in the beef sector
since 1981. Due to consumption patterns, beef prices began to
decrease in real terms in the US and its behaviour has been
atypical with respect to production and price cycles which has
occurred traditionally. Thus, Costa Rica went from exporting beef
at $4.69/kg in 1979 to exporting it at $2.51/kg in 1989 (in 1990
dollars). The main consequences of these changes have been the
following:

(a) SUBSIDIZED INTEREST RATES: Livestock credit allocated
between 1970 and 1983 had negative average real interest rates,
and in some years annual rates were greater than -10%. This was
specially true for those credits given between 1973-1975 and
1979-1983 [Table 9; (BCCR, 1991b)]. Since then, Costa Rica has
adjusted its nominal interest rates based on inflation,
generating annual real rates close to 10%.

(b) INCREASE IN AMOUNT OF CREDIT: From 1970 to 1980 the amount
of credit allocated to the livestock sector grew at a rate of 10%
a year [Table 10; (BCCR, 1991b)]. However, since 1981 it has
decreased to levels that in 1989 were similar to those allocated
in 1970.

(c) INVESTMENT IN INFRASTRUCTURE: Significant investments were
made with public funds. New roads were built and electricity
provided. The road network tripled from 2,557 km in 1974 (67%
paved) to 7,227 km in 1990 [50% paved; (MOPT, 1991)].

Table 9. Real
annual interest rates for credits allocated to the
livestock sector during the period 1970-1990.

Rate

Rate

Year

(%)

Year

(%)

1970

1.40

1980

- 6.85

1971

4.85

1981

-18.25

1972

3.05

1982

-39.00

1973

- 6.25

1983

-11.00

1974

-16.80

1984

5.35

1975

- 8.15

1985

5.65

1976

4.35

1986

9.10

1977

3.65

1987

4.90

1978

1.90

1988

4.70

1979

- 1.20

1989

9.00

1990

8.00

Table 10. Amount
of credit allocated to the livestock sector in 1990
dollars during the period 1970-1990.

Credit

Credit

Year

(million $)

Year

(million $)

1970

105.6

1980

267.0

1971

134.3

1981

212.0

1972

159.1

1982

129.7

1973

174.3

1983

166.5

1974

171.7

1984

213.5

1975

180.6

1985

204.7

1976

199.1

1986

184.1

1977

220.5

1987

148.6

1978

246.1

1988

116.0

1979

264.1

1989

105.4

These investments allowed a rapid change from beef to dairy
and dual-purpose activities. Between 1973 and 1984, the inventory
of females >2 years decreased 2.4% per year in beef herds and
increased 9% per year in specialized dairy and 19.2% a year in
dual-purpose herds (Censos Agropecuarios 1973, 1984). These
investments also allowed producers to capture benefits created
with public funds through land appreciation and reduced transport
costs.

MICRO-ECONOMIC FACTORS: Effect of Government Incentives at the
Farm Level

The effect of the above government incentives had the
following impacts at the farm level:

(a) SUBSIDIZED CREDIT: Table 11 shows the amount of credit
allocated and subsidies received by producers due to negative
real interest rates by year they began dairying. As shown,
average net subsidy per producer varied from $149 to $11,133
depending on beginning year. If credit institutions (i.e.,
public) would have charged a 10% real interest rate on credit,
these subsidies would have been in the order of $6,200 to
$18,300. These benefits contributed positively to the government
policy of maintaining milk prices while labour wages (Table 8)
continued to increase.

The increase in farm size (Table 1) is explained by the
benefits received as well as by the early biological and economic
performance of the replications. Table 12 contains the regression
coefficients that explain this increase in Río Frío, which
expanded the most. The effect with greatest importance is related
to years in business expressed in quadratic form and in areas
allocated to activities other than dairy or agriculture (i.e.,
forest and/or idle land). Producers who began dairying earliest
with the entire farm area allocated to dairying had higher
credits for acquisition of animals and benefited most from
subsidized interest rates and high milk prices.

Those producers with most productive cows and,therefore,
higher use of concentrate feeds, accumulated less capital and
limited their increase in area.

In Río Frío increases in area happened before and during the
opening of the highway and electrification in 1986. Additionally,
this favoured those who began dairy activities first (1979-1981)
since based on the subsidies received, they acquired land before
it appreciated.

(b) CAPTURE OF BENEFITS: Table 13 shows the benefits captured
by producers. As shown, Río Frío has captured greater benefits
through land appreciation given the initial level of
infrastructure. Likewise, Table 13 contains the net present value
of savings by producers from milk transport costs due to the
highway construction and installation of cooling tanks from
availability of electricity.

Table 11. Amount
of credit given to each producer and subsidies received
in Río Frío and Sonafluca due to negative real interest
rates (as occurred) and the amounts that credit
institutions could have recuperated if real annual
interest rate would have been 10%.

As
Occured

BEGINNING

CREDIT

CREDIT

% CREDIT

YEAR

GIVEN

PAID

SUBSIDY

PAID

($)*

1979

16,745

8,418

8,327

50.3

1980

18,882

7,749

11,133

41.0

1981

7,586

3,387

4,199

44.6

1982

11,094

8,649

2,245

78.0

1983

12,430

12,281

149

98.8

1984

10,287

8,995

1,292

87.4

As
could have occured

BEGINNING

CREDIT

% CREDIT

YEAR

TO PAY

SUBSIDY

TO PAY

($)*

1979

23,092

14,674

137.9

1980

26,039

18,290

137.9

1981

10,462

7,075

137.9

1982

16,495

7,846

148.7

1983

18,481

6,200

148.7

1984

15,295

6,300

148.7

* Unadjusted dollars

In Río Frío the increase in land value is 84%, reflecting
investments of public funds not re-captured by the government
through tax appreciation. In the case of Sonafluca, the benefits
due to public fund investments have been lower (i.e., 29%)
because the ecozone already had electricity and paved roads by
the time producers began dairy activities, and also because
dairies were located closer to a milking plant.

Considering the credit subsidy and the benefit captured by
land appreciation, each producer has directly received between
$31,051 for those who initiated last in Río Frío and $41,887
for those who initiated first in Sonafluca (Table 13).

Future challenges

In these two ecozones society has invested scarce public
resources in land and infrastructure waiting for a return through
higher production and lower consumer prices. Even when the
invested amounts are adequate to stimulate production, the
response of the system has been poor and decreasing with time.
The main limiting factors to solve are:

Re-structuring of the sector

Traditionally, these systems have based their milk production
on using family labour, which in 1990 accounted for 62% to 76% of
production costs considered in this study. Additionally, wage
rates have been increasing in real terms in the last 20 years,
averaging 4% per year (Table 8). Including social benefits that
producers have to pay, the average minimum wage for the livestock
sector in 1990 was $7.79/day [$5.41/day plus 44% of social
benefits, (MTSS, 1991)].

Table 12. Estimated
value, standard error, and significance level of analysis
of variance explaining the expanding factors in farm area
of producers in Río Frío.

Estimated

Standard

Significance

Factor*

value

error

level

Beginning
year

in dairying
(X1)

0.0762

0.0359

0.0488

Idle land
(X2)

-1.3718

0.5453

0.0222

Consumption
of

concentrate/cow
(X3)

-0.4625

0.1519

0.0073

Milk
production

per cow (X4)

-0.0349

0.0268

0.2105

* The mathematical model was Y = B1(X15)+B2(X2)+B3(X3)+B4(X4)
with regression constant of 6.0239 with R5= 0.57 and mean square
error=123 with four degrees of freedom for regression and 17
degrees for the residual

Thus, if labour wages continue to increase, these production
systems with small areas (i.e, 10 ha) may not be competitive if
they are to (1) have incomes similar to the minimum wage; (2)
reduce production costs equal to those for international
protection against imports, currently at about $0.20/kg milk; and
(3) compete in an economy without subsidies. This re-structuring
of the sector requires an analysis of the following factors:

(a) ACTUAL PRODUCERS: These producers are on average 47 years
old. Because of the dynamics of their systems in the last decade,
they have:

Table 13. Estimated
land commercial value in 1990 dollars, year of paved road
and electricity construction and installation, and net
present value of captured benefits by producers in Río
Frío and Sonafluca through milk transport costs.

** Calculated similar to above formula but dividing final
product
by a factor of 3 since milk truck now collects milk every three
days and not daily as before when milk tanks were not available
*** Calculated from the summation of credit subsidy [(Table 11),
averaging $6887/farm for those who initiated first and $1051/farm
for those who initiated last] and land appreciation ($30,000/farm
for Río Frío and $35,000/farm for Sonafluca).

Received greater benefit through subsidies (land appreciation
and interest rates) than their efficiency of milk production.
That is, social investment in these dairies is not in proportion
to their production efficiency. As shown in Table 14, the actual
systems would not be viable if society would ask them to return
the subsidies given to them in a 10-yr period with a real annual
interest rate of 10%. Under these circumstances, their net
income, excluding family labour, would fluctuate between 33% and
60% of the 1990 minimum wage with actual labour efficiency.

These systems have only survived with their operational sizes
at constant milk prices because they have received subsidies.
This could be a limiting factor in an open economy, because of
the reaction by similar producers to a more dynamic policy
without subsidies and with mechanisms to re-capture public fund
investments.

Table 14. Net
income per farm, (excluding family labour), subsidy
payment if society would ask each producer to return it
back, and annual net income per farm (excluding family
labour) after paying subsidy compared to family labour
cost valued as minimum wage for producers in Río Frío
and Sonafluca who began dairying between 1979-81 (first)
versus those who began after 1981 (last).

Variable

First

Last

US$

US$

RIO FRIO:

a. Annual Net
Income*

7078

9027

b. Subsidy
Payment**

5533

4658

c. Net Income
after

Subsidy
Payment* (a-b)

1545

4369

d. Family
Labour Cost

Valued as
Minimum Wage

4620

7227

SONAFLUCA:

a. Annual Net
Income*

9952

9182

b. Subsidy
Payment**

6283

5408

c. Net Income
after

Subsidy
Payment* (a-b)

3717

3774

d. Family
Labour Cost

Valued as
Minimum Wage

8327

8749

* Excluding family labour
** Calculated from total value of subsidy received (Table 13)
payable in a 10-year period at a real annual interest rate
of 10%

Low efficiency in the use of family labour. Table 15 shows the
percentage of under-utilized family labour based on producers'
criteria. Thus, family labour efficiency can be easily increased
by 24% to 37% without the incorporation of additional labour and
by 67% to 99% with incorporation of small equipment.

In a economic system where reducing production costs is
necessary to compete, this could be a limiting factor given that
family labour is a fixed cost (i.e., without possibility of
sporadic use) and additionally, the most important resource of
production costs (i.e., 62% to 76%) and the only one that has
been systematically increasing in the last 20 years and that will
continue to increase in a development process.

(b) OPERATION SIZE: With an open market economy, possibilities
could exist where milk price is reduced to levels of
international protection from imports (i.e., $0.20/kg). This
would imply a 30% reduction in the actual milk price (Table 7).

Table15.
Percentage of labour under-utilized with hand and machine
milking based on producers' criteria* in Río Frío and
Sonafluca who began dairying between 1979-81 (first)
versus those who began after 1981 (last).

Hand

Machine

Milking

Milking

%

%

First

Sonafluca

29

74

Río Frío

34

99

Last

Sonafluca

37

67

Río Frío

24

80

* Based on additional milking cows that family
could manage with current available labour allocated to dairying

An analysis was done with an electronic spreadsheet to
determine the number of years these producers could subsist
receiving minimum wage for their family labour. Even when the
parameters used were conservative with respect to what could
happen (i.e., 5% opportunity cost on capital in animals and
equipment; 4% annual increase in real terms in labour wages; and
a 10% annual reduction in real terms in milk price until it is
stabilized at $0.20/kg), the subsistence time of actual
production systems would be less than 4 years, showing the need
to increase family labour efficiency.

Labour efficiency can be improved by increasing land
productivity or operation size. The first alternative has not
demonstrated attractive results since the incorporation of new
pastures to replace ratana would only increase the viability of
the system by one to three additional years. In this analysis the
area in ratana was substituted by B. ruziziensis as
existed in the beginning, assuming this would last four years
before degrading again into ratana. Also, based on producers'
opinions, it was assumed that one hectare of brachiaria without
fertilization increased stocking rate by 33% and produced 1.5
kg/cow/day of additional milk in relation to ratana.

With this operation size (10 ha), the cost of labour
($7.79/day) and its efficiency, and the cost of establishing new
pastures ($350/ha), it is impossible to produce milk at $0.20/kg.

This suggest that the only alternative for reducing production
costs under the actual scenario is to increase farm size above 20
ha. Reducing family labour is not viable because, in the majority
of cases, family labour represents labour out of the formal job
market (senior citizens or young people of school age) whose
efficiency in many activities do not differ from an adult.

(c) CONTRIBUTION TO DEVELOPMENT: The objective of IDA has been
to provide employment in rural areas by allocating land to
settlers, thus avoiding migration to main urban centres. In this
case study, producers were receiving a government subsidy of
about $796/family/yr at the time the project was initiated.

These public fund investments in land and subsidized credit
have drastically increased their standard of living. Thus, these
subsidies represent the cost that society has paid to generate
employment opportunities through milk production with small
producers in the rural sector relative to investing these
resources in other alternative uses.

The dilemma now is that the actual production systems are not
economically viable with actual labour efficiency and cost. Thus,
alternatives need to be developed to facilitate the transition to
other uses of land under these soil conditions.

Research needs

High milk prices, subsidized credit, and public fund
investments in infrastructure have increased the market value of
land. These factors have, in part, contributed to the
deforestation process, a rate that in Costa Rica during the 80s
was about 500 km5 per yr. Thus, in the last 10 years, about 10%
of the total area of the country was de-forested (CCAD, 1991).

The solution to this problem appears to be decreasing the
price of milk, reducing public fund investments in infrastructure
in fragile soils, and developing alternative uses for farms
located in these soil characteristics. Our research could
contribute to this process to facilitate the transition of these
farms to new alternatives and document impacts on natural
resources of new options. Also, to look for mechanisms to induce
expansion of dairy farms into ecozones with a comparative
advantage in open markets.

Conclusions

Dairy development with small producers in these ecozones could
not have been possible without investment of subsidized public
funds. With realistic real interest rates, and with the family
labour utilized, these producers would be receiving the
equivalent of 33% to 60% of the minimum wage in 1990. Thus, this
development model has been exhausted due to increasing labour
rates, market restrictions (i.e., milk surplus) at current
prices, and conflict with natural resource conservation.

The current capitalization amounts of producers are superior
to those initially thought, even when their productivity was
inferior to the initial proposal (CATIE, 1981). About 84% and 29%
of the capitalization in Río Frío and Sonafluca, respectively,
was due to public fund investments which were captured by
producers.

Dairy farmers behaved rationally to biological and economic
conditions. Differences with respect to the proposed model were
caused by the rigid character of recommendations in relation to a
dynamic economy (i.e., relative changes in input and output
prices, interest rates, credit availability) and changing
scenarios of biological conditions (i.e., soil degradation,
nutrient loss).

Without subsidies, with the operation sizes found, and the
existing labour efficiency, protection from dairy imports seems
unfeasible if labour retribution similar to the minimum wage is
to be maintained when this increases 4% per year in real terms.

As has been traditionally argued, credit was not a limiting
factor in technology adoption. Producers who accumulated capital
used it to expand farm size instead of increasing productivity.
For the actual capitalization levels, this was a logic decision.

The subsidy per hectare fluctuates between $3100 and $4200
(Table 13). With these investment levels, the government should
be more careful in selecting land for agrarian reform plans. The
system should generate $310/ha to $420/ha (i.e., 3-4 MT of corn
at international prices) just to pay interest on capital
investment. This could only be feasible in fertile soils and with
lower labour rates, which is not the case in Costa Rica.

The emphasis in farming systems research was to propose small
changes in the system assuming stable macro-economic conditions.
The experience from this study indicates these conditions were
stable before the project began. Throughout its duration, great
adjustments have been presented, permitting the same production
system to capture from $149 to $11,133 (Table 11) based only on
changing interest rates within a three-year period. Thus, this
experience suggests a permanent feedback at all hierarchical
levels to evaluate the evolution of production systems. With an
open market economy, research systems will need more effective
multi-disciplinary teams to continuously analyze the influence of
macro-economic aspects.

Acknowledgments

The authors are grateful to the Regional Office for Latin
America and the Caribbean of the International Development
Research Centre (IDRC) for financing this study. We also thank
IDA for its cooperation in facilitating technical personnel to
conduct the survey.